Wednesday, March 18, 2009

Phillip Moeller, writing for U.S. News & World Report, argues against recent poll findings showing that Americans lack faith in the Social Security program.

Given the Swiss-cheese appearance of private investment accounts and pensions, it's understandable that we've had multiple Congressional hearings about the adequacy of 401(k)'s and IRAs. But restoring confidence in consumers about their financial futures could be more effectively and appropriately achieved if we made sure that Social Security would be dependable for the next 75 years. Having done this, we then need to pound this point home to consumers and help educate them about financial responsibility and Social Security's role in a successful retirement system.

3 comments:

Thanks for the link, it was nice to be able to leave a comment in a national outlet.

Typically the author, though sympathetic to SS, only laid out two options: raise retirement age or lift the payroll cap. Which is typical, because President Bush in forming the Commission in 2001 laid down the principal of 'no broad based payroll tax increase' as non-negotiable. While it was acceptable to ask that people take large reductions in future benefits through changing from wage indexing to price indexing or to accept the fact that their children might have to labor until they were 69 or 70 it was simply NOT acceptable to offer them the choice of a tax increase, not even as part of the package. And the reason is pretty simple, I call it arithmetic.

$10/hr x 40 hrs/week x 52 weeks/year x 1.92% /2=$199.68/year or 54 cents/day. (This assumes paid vacation and the employer/employee split) Or you could combine that with the LMS cap increase (scored at 1.0% by the OACT) and get the need cost of the fix for this lower income worker down to 26 cents a day. Who wouldn't buy a couple of years of paid retirement for a quarter a day?

Yet somehow 'all options are on the table' was framed in a way that excluded this one.

Bruce,You'd be surprised at how much I agree with you. If people are living longer then Social Security benefits may become even more valuable, and in that case there's no reason people shouldn't pay for them. But the emphasis here is that people should pay for them themselves; most on the left want to shift the burden toward higher earners by raising the cap, etc., and it's not clear what the rationale for that really is. I'd rather simply life the payroll tax rate and pay people higher benefits.

That said, the rate increase wouldn't be a constant amount. Let's say we raise the payroll tax rate by 1.7%, to match the 75-year deficit. By next year, however, the 75 year deficit should rise to around 1.77 percent or so; if people want to continue to raise the tax rate that's ok. If we want a single constant tax rate that won't ever need to be raised (at least in expectation) the increase would be around 3.2 percent, I think.

We know that the full burden is born by the worker, so in effect he'd pay an extra 1.6 percent from his own wages but could also expect to see his earnings fall by 1.6 percent to cover the increased employer share. For a typical worker earning around $40,000, that comes to $1280 per year (or $24 per week). Whether that's "worth it" is a value judgment; we know mathematically it will be worth it, since increased future benefits will equal the increased present tax plus interest at the trust fund rate. Not a bad deal for a low risk investment with free annuitization, but others might prefer to save on their own. There's no "right" answer here, just a matter of what people would like to do.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.